Nordstrom’s off-price Rack stores are struggling. It’s opening more of them anyway

Nordstrom Inc. on Thursday said it would end its business in Canada to help shore up profit but try to strengthen its struggling off-priced Nordstrom Rack stores, as retailers recalibrate the way they sell clothes to inflation-weary shoppers.

The upscale department-store chain announced the moves after issuing disappointing fourth-quarter sales and full-year sales expectations, as retailers competed with each other on holiday markdowns and customers grew pickier about purchases. However, Nordstrom was more upbeat on profit.

Executives of the Seattle-based retailer said that the Canadian business accounted for less than 3% of total sales and said shutting it down would help the company focus on the U.S.

“We entered Canada in 2014 with a plan to build and sustain a long-term business there,” Chief Executive Erik Nordstrom said in a statement. “Despite our best efforts, we do not see a realistic path to profitability for the Canadian business.”

Executives, during a post-earnings-report conference call, said they would open 20 new Nordstrom Rack stores this year. By comparison, during fiscal 2022, the company opened only three stores, two of which were Rack locations.

“Rack stores continued to be our largest source of new-customer acquisition, accounting for more than 40% of newly acquired customers in 2022,” Erik Nordstrom said. “Our Rack store fleet is underpenetrated, and we have an opportunity to attract more customers and drive profitable growth through a proven model as we expand our reach with more new stores.”

However, sales at Rack stores fell 8.1% during the fourth quarter, as lower-income consumers experienced pain from rising prices — for more basic needs than clothing — more sharply. Executives said they would try to reverse that trend, in part, by stocking store shelves with 100 “well-known and loved” brands that they said had more room to grow in off-price retail.

Retailers this month have signaled more caution about the year ahead — but more discounts for consumers over that time. Some retailers are talking up their cheaper selections of private-label brands. Target Corp. this week said it would sell more lower-priced items. Macy’s Inc., during its earnings conference call on Thursday, said it would evaluate, “refresh, reimagine and replace” its private-label brands over the next three years.

For its fourth quarter, Nordstrom reported net income of $119 million, or 74 cents a share, compared with $200 million, or $1.23 a share, in the last quarter of 2021. Revenue came in at $4.32 billion, compared with $4.49 billion in the year-earlier quarter.

Analysts polled by FactSet expected Nordstrom to report earnings per share of 67 cents, on revenue of $4.34 billion.

For the full year, Nordstrom said it expected revenue to fall 4% to 6%, and adjusted earnings per share — excluding charges related to the wind-down of its Canadian business — of between $1.80 and $2.20. The consensus FactSet forecast called for adjusted earnings per share of $1.98, with sales largely unchanged from fiscal 2022.

Shares edged lower by 0.7% after hours on Thursday.

Clothing retailers last year slashed prices, through the holidays and earlier, as their stockrooms piled up with items that customers didn’t want, after rising food prices redirected spending toward basic priorities.

“The holiday season was highly promotional, and sales were softer than prepandemic levels,” Nordstrom, the chief executive, said in January. “While we continue to see greater resilience in our higher-income cohorts, it is clear that consumers are being more selective with their spending given the broader macro environment.”

He said the company was entering the new fiscal year with “clean inventory levels, even if this required more markdowns than planned.” He said the company was focused on being more conservative about the clothing and other goods it purchased, and focused on ways to sell items more quickly.

Management for Kohl’s Corp. this week said it expected discounting among retailers to “remain competitive.” At Macy’s Chief Executive Jeff Gennette said, discretionary spending is expected to be “under pressure across income tiers” this year.

Shares of Nordstrom are down 28.4% over the past 12 months. By comparison, the S&P 500 index has fallen 9.3% over that period.

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